What is a private mortgage?
A private mortgage is a real‑estate loan funded by a private party—often an individual or a private lending company—rather than a bank or credit union. These loans are commonly used by investors in fix‑and‑flip financing, and by buyers of properties that won’t qualify for traditional financing until repairs are completed. Private mortgages can also serve as a short‑term solution to prevent a foreclosure bailout or consolidate liens when time and circumstances are working against the borrower.
Why borrowers choose private mortgages
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Speed & flexibility: Terms can often be tailored to the situation (interest‑only periods, short terms, customized draws for rehab budgets, etc.).
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Asset‑based underwriting: Approval often focuses more on the property’s value and equity than on perfect credit or conventional income documentation—see asset‑based lending.
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Problem solving: Useful as a bridge to stabilize a situation—complete repairs, resolve collections, or buy time—before refinancing into a conventional loan.
Typical leverage: Many private lenders cap loans around 60% loan‑to‑value (LTV).
Example: If a property’s market value is $100,000, a 60% LTV private loan would be $60,000.
What to expect (common features)
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Term: Short—often 6 to 36 months; some structures resemble a bridge loan.
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Payments: Frequently interest‑only with a balloon payment at maturity.
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Documentation: Some lenders require credit checks, an appraisal and/or survey; others may waive one or more items depending on the deal.
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Costs: Higher interest rates and origination points than bank loans, in exchange for speed and flexibility.
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Prepayment penalties: Vary by lender; review any prepayment penalty terms and minimum‑interest provisions.
When a private mortgage can help
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You need to close quickly on a fixer‑upper or competitive deal.
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The property needs repairs before it can qualify for traditional financing (use a rehab budget and clear draw schedule).
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Credit is bruised, income is unconventional, or documentation is limited.
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You need a foreclosure workout or to pay off liens and collections.
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You’re an investor executing a fix‑and‑flip or BRRRR strategy.
Key cautions
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Have an exit strategy (sale or refinance) before you close.
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Budget for total cost of capital (rate, points, fees, rehab draws, and closing costs).
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Know the lien position and ensure clear title and liens.
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Understand regulations for owner‑occupied properties (see compliance basics); this is general information, not legal or financial advice.
Real‑World Scenarios (Details condensed and anonymized)
Scenario 1 — Foreclosure avoided after an old second mortgage resurfaces
A client had filed bankruptcy a few years earlier and stopped paying a second mortgage that continued accruing interest at 13%. When the current holder of that second scheduled a foreclosure hearing, the borrowers contacted us. Before the hearing date, we arranged a private mortgage that paid off both the first and second liens, stopping the foreclosure. From the remaining equity, the client received $20,000 to resolve collections and begin rebuilding credit.
Scenario 2 — Credit challenges + property updates → refinance exit
Another client had poor credit and a property that needed updates to qualify for bank financing. We placed a 60% LTV private loan with a small construction reserve so repairs could be completed quickly. Once the work was done and the property value increased, the client refinanced into a conventional loan, paid off the private mortgage in full, and reduced their monthly payment.
Quick checklist
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Define your exit: Sale or refinance, with a realistic timeline.
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Confirm value & equity: Current as‑is value and after‑repair value (if applicable).
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Itemize costs: Rate, points, fees, closing costs, and rehab budget.
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Verify documentation needs: Credit pull, appraisal, survey, income evidence (as required).
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Review terms carefully: Prepayment language, draw schedules, default interest, and extensions.